Waheed Hassan hardly reminds anyone of Gordon Gekko. A
31-year-old stock analyst with a high, boyish voice, Hassan founded
his Potomac Falls, Virginia-based independent stock research firm
in May 2003, with two other partners. Hassan's firm, Investology,
remains tiny, with only one full-time employee. Unlike analysts at
big investment banking firms, Hassan doesn't appear on CNBC in
sharp suits, give frequent quotes to The Wall Street Journal
or expense fancy lunches. No, Investology toils in relative
obscurity, focusing on stocks of companies most Americans have
never heard of. "We do research on small capitalization
stocks," says Hassan. "Merrill Lynch, Morgan Stanley-they
don't cover small caps [today], so it's an opportunity for
us."

These days, there are more and more Waheed Hassans, and fewer
and fewer Gordon Gekkos. Over the past three years, as IT has made
it easier for entrepreneurs to sell stock research, and as scandals
involving Wall Street brokerages have sullied the image of the
largest firms, the market for independent stock research and
analysis has opened up. And savvy entrepreneurs like Hassan are
stepping into the breach, taking business from the financial
giants. Indeed, despite its hand-to-mouth existence,
Investology's independent research has already won the company
a relationship with one of the bigger U.S. pension funds.

The Scandal Effect

For decades, most stock research was handled by large firms that
employed reams of analysts to cover a wide range of stocks. But
they didn't just analyze stocks: The big boys also made money
with financial advisors, brokers and investment bankers.

Since 2000, however, investigations by financial watchdogs have
revealed that some of the larger firms' stock research was not
truly independent. Corporate chiefs at the bigger investment houses
were pressuring analysts to rate certain stocks highly so their
brokers and investment bankers could sell more of the stock, and
the investment houses could then benefit from public offerings of
stocks they had touted.

Many individual investors-especially those who jumped into the
market in the go-go '90s-believed the analysts were independent
and lost billions betting on their recommendations. In the wake of
a multiyear investigation into the big firms' research, 10
large Wall Street firms admitted their wrongdoing and, in April
2003, paid a $1.4 billion fine.

These scandals have given entrepreneurs two historic
opportunities. First, as larger Wall Street investment houses faced
huge fines for their actions, they had to cut costs. Big Wall
Street houses laid off hundreds of stock analysts who had the
expertise needed to offer high-quality research, with several firms
cutting as much as 40 percent of their staff. Consequently, the big
firms simply stopped monitoring whole groups of stocks, like the
small caps that Investology focuses on.

David Riedel was one of those experts. In 2002, Riedel was laid
off as an analyst at Salomon Smith Barney. "I realized there
were huge opportunities [due to] the breakdown in certain types of
research by bigger firms," he says. With a strong background
in Asia-Riedel got a graduate degree in business from a Thai
university, speaks Thai and Chinese, and had analyzed Asian stocks
in the mid-'90s for Salomon Brothers-he decided that Asia would
be his niche. As the larger firms downsized, they cut most of their
independent research on the ground in Asian markets outside China
and Japan, Riedel says. Yet, in the past three years, he says,
these Asian markets have posted some of the strongest growth in the
world. Seeing that hole, in May 2003 Riedel started his own
company, Riedel Research Group Inc., out of his New York City
loft.

Riedel, 37, hired seven local analysts in three Southeast Asian
countries, and hit the ground fast, focusing on Indonesia, Malaysia
and Thailand. The internet made it even easier for him to get
started. After hiring Thai analysts through local word-of-mouth, he
turned to an Asian online job board to find his other analysts and
has been thrilled with the quality of their research.

With a niche in place, he started drawing on old connections,
emphasizing that he was offering services others didn't.
"I pitched my research to [mutual and pension] fund managers
who have holdings in Asia [and] are being poorly served by big
investment firms [that] don't have analysts on the
ground," Riedel says.

Six clients quickly signed up with Riedel, and he plans to have
30 by year's end. Riedel believes his on-the-ground
information, tailored to his customers, has paid off. He advised
clients not to pull out of holdings in Indonesia, despite the
country's recent political instability due to terrorist
attacks. This year, Indonesia quieted down, held a peaceful
presidential election, and watched its stocks soar.

A Matter of Trust

The scandals have not only left more stocks ignored by large
companies-they've also eroded Americans' trust in large
Wall Street firms' advice. In fact, polls now consistently show
that average investors mistrust nearly all the larger firms'
research. "We get many people walking in here for the first
time specifically because they don't trust the bigger
names," says Emily Sanders, 50, founder and president of
Sanders
International Inc., a small financial advisory and investment
management firm in Norcross, Georgia. "They think it'll be
easier to hold us accountable." Indeed, while Sanders once
shied away from advertising that her firm was small for fear
investors equated small with lack of expertise, now she openly
advertises her company's size to lure customers.

Sanders, too, has found a niche, which is crucial to smaller
investment houses. Sanders International focuses on affluent young
women, whom she believes are still treated shabbily by larger,
male-dominated Wall Street firms. "They talk down to [women
investors] all the time. We never do," she says. Today,
Sanders manages over $80 million in client assets, and 50 percent
of her customers are women, a high figure in the industry.

Some small financial companies will benefit directly from the
big firms' $1.4 billion settlement. As part of the fine, the 10
big investment houses will pay roughly $450 million for independent
research not tainted by ties to brokers and investment bankers. As
further punishment, the 10 big boys will be required to post the
independents' research on the big firms' own websites, a
kind of free advertising for entrepreneurial investment firms.
Already, a group of five small investment research houses have
banded together, forming a consortium called Best Independent
Research, to provide research to the big firms' sites and
toll-free investor hotlines. Meanwhile, the Bank of New York has
signed agreements with more than 150 independent suppliers to
distribute their research.

Though other small companies may not benefit directly, smart
entrepreneurs have used the big firms' troubles to convince
clients that small research is better. "We're so different
from the Wall Street firms because they make money selling stocks,
and we only make money doing research," says Chris Hackett,
who started his own firm, Greenwich Investment Research Inc., in December 2001
out of his Greenwich, Connecticut, home. To show he stood behind
his work, unlike the larger firms, Hackett took a bold risk. From
the start, he invested his own money in the stock picks his firm
touts. "I put my retirement funds, my investment for my kids,
into every piece of research we do, and we stay in that position
alongside our clients," Hackett says. "When you're
betting your own money, you really don't want to make a
mistake."

Hackett focuses on high-end professional investors, including
some of the biggest mutual and pension funds, selling them his
intensely detailed research reports-dense 20- to 30-page documents
he compares to "a thick issue of The
Economist"-for a fee of $20,000 annually. Hackett also
does extra, tailored, follow-up research on any stock for a
customer. "We wouldn't want to get too big-it's really
important that we have a direct relationship with clients,"
Hackett says. Still, "Hackett's Special Situation
Report" has proven profitable enough that the two-person firm
recently added a marketing expert.

Hackett believes his research is simply better. "We look
for anoma-lies in the market that bigger firms miss," he says.
Hackett points to CenterPoint Energy, a Houston-based power
corporation, as an example. "Everyone on Wall Street hated
[CenterPoint] last year. It was at $5 a share because they'd
done some stupid things on their balance sheet," he says.
"But amidst the mess, they had strong earnings. We went
against everyone from Wall Street-my dad's own stockbroker told
him not to invest with me in it. But it was a no-brainer."
Today, CenterPoint trades at nearly $11 per share, and clients of
"Hackett's Special Situation Report" reaped huge
profits.

Finding Your Niche

For people without knowledge of investment advising, getting
into the business seems like a snap. There are relatively low
barriers to entry, since it doesn't take much capital to open
an office, and getting certified as an advisor is not difficult in
most states.

But building the kind of trust that attracts clients is much
harder. Emily Sanders, founder and president of investment advisory
firm Sanders International Inc. in Norcross, Georgia, believes
finding a market niche is crucial. In her case, it's affluent
women-an underserved client base. Similarly, Jennifer Black, a
financial analyst who formed Jennifer Black & Associates from
her home in Lake Oswego, Oregon, has focused on researching apparel
and retail companies, becoming an expert in these areas.

Once they find that niche, savvy entrepreneurs use
unconventional ways to reach these clients. Big financial firms
tend to attract clients through traditional advertising and
word-of-mouth, which can be expensive and time-consuming. But
Sanders, for instance, has become a corporate contributor to the
Atlanta Women's Foundation, a nonprofit organization, to help
promote her services and net new clients.

Perhaps most important, given the current skepticism toward
investment research, entrepreneurial advisors must promote their
independence, the key advantage that sets them apart from the big
boys. Small financial advisors simply have to use every opportunity
to emphasize that because they don't have brokerage operations,
their research can't be tainted.

Small Wonders

But even as the financial industry changes, it's hardly easy
going for entrepreneurs. Selling research on larger capitalization
stocks-the big, well-known companies that are interesting to a
wider range of investors-remains tough sledding for small firms.
"I can't compete with [bigger firms] writing a report on
IBM," says Hassan. "They have too many analysts on
it." Indeed, even midsize research companies like
Chicago-based Morningstar, which has made itself a brand name in
the industry, often shy away from doing detailed research on the
biggest caps.

Still, independent research firms can be proud of the strides
they've made. A new study by three eminent finance
professors-Brett Trueman of University of California, Los Angeles;
Brad Barber of University of California, Davis; and Reuven Lehavy
of University of Michigan, Ann Arbor-found that independent stock
firms made more accurate stock picks between 1996 and 2003 than the
larger Wall Street companies. In the weaker, post-2000 stock
market, the independents outperformed the larger investment firms
by an even wider margin, perhaps because the independents were not
worried that downgrading companies would hurt their brokers'
abilities to sell stocks. If they keep it up, maybe one day
entrepreneurs like Waheed Hassan will rule Wall Street.

Scandalous!

One reason the smaller companies have a chance in the investment
business today is that many Americans no longer trust the big boys.
Over the past four years, a series of scandals have suggested that
some of the analysis of larger investment firms is Biased. Here are
just a few of the highlights-or lowlights.

May 2002:

After an investigation by regulators into conflicts of interest
in its research and analysis department, Merrill Lynch pays a $100
million fine. In the investigation, e-mail messages by leading
Merrill Lynch analyst Henry Blodget leak to the press. The e-mails
suggest that several of the analysts, including Blodget, publicly
talked up stocks that in private they disdained-stocks whose
investment banking business Merrill wanted to win. Later, similar
e-mails come out at other top firms.

October 2002:

New York Attorney General Eliot Spitzer files suit against top
officials from five telecommunications companies, arguing that they
gave investment banking business to Citigroup in a deal to have
Citigroup analysts boost the ratings of their stocks.

December 2002:

In an ongoing investigation by regulators into conflicts of
interest at several other top Wall Street houses, including Goldman
Sachs, Morgan Stanley and Citigroup Global Markets (formerly
Salomon Smith Barney), the big firms agree to pay a whopping $1.4
billion fine.

September 2003:

Spitzer and the SEC announce that they've launched another
investigation-this one into conflicts of interest among several of
the largest mutual fund firms.

October 2003:

Citigroup Global Markets fires four of its brokers after further
investigation into their trading practices.

May 2004:

The SEC announces a new set of ethics codes for mutual funds,
requiring them to provide more disclosure of some of their trading
practices.

August 2004:

Janus Capital Group, one of the larger American mutual fund
groups, agrees to pay a fine of $226.2 million after an
investigation by regulators into improper trading.